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Bork's Paradox

Robert Bork, who died yesterday, is remembered largely as a Constitutional scholar, but his most important contributions dealt with antitrust. He was sharply critical of the modern application of US antitrust law, while remaining wedded to the Knight-Friedman-Stigler idea of perfect competition as a welfare benchmark, leading to a number of confusions and contradictions. One of the best treatments of Bork’s approach to competition is Jack High’s 1984 article, “Bork’s Paradox: Static vs. Dynamic Efficiency in Antitrust Analysis” (Contemporary Economic Policy 3: 21–34). Writes High:

Judge Robert Bork holds two opposing attitudes towards perfect competition. It is a highly useful economic model for illustrating allocative efficiency, but it is a defective policy model because it deliberately omits productive efficiency. He reconciles these attitudes by combining perfectly competitive allocative efficiency with dynamically competitive productive efficiency in his analysis.

However, these two kinds of competition do not readily mix. One is a static equilibrium concept, the other a dynamic disequilibrium concept. One assumes perfect knowledge and the absence of change; the other assumes imperfect knowledge, learning, and continual flux. Each kind of competition is built on assumptions which, if true, would preclude the existence of the other.

Bork’s policy conclusions require the simultaneous existence of both kinds of competition. If he drops dynamic competition from the analysis, a much more stringent antitrust policy is called for. If he drops static competition, economic theory does not justify even his strictures against mergers and cartels.

Many of the Chicago people have been helpful in the empirical research they’ve done on some of these cases. Scholars like Robert Bork, Yale Brozen, William Bowman, Harold Demsetz and others, have performed valuable services by showing, for example, that just because markets are concentrated doesn’t mean the leading companies earn exorbitant rates of return. They’ve shown what big business has really done: innovated and kept prices low. They’ve shown that mergers make economic sense.

Where you get a dramatic divergence is on the theoretical level, and that plays itself out in some aspects of policy. The Chicago School is still married to neoclassical price theory. It is still married to equilibrium theory and to a version of the perfect competition as a model, or a benchmark against which you compare performance in the real world. And Chicago School economists still hold an incorrect theory of monopoly power. They still want to talk about market share and concentration ratios. They still haven’t adopted the view that so long as markets are legally open, they are necessarily competitive and rivalrous, and they ought not to be regulated.

The consequence is this: Chicago School economists will not argue that we should abolish the antitrust laws. I remember spending hours upon hours trying to persuade Yale Brozen that we should get rid of the antitrust laws. He would go 99 percent of the way, and suddenly say: “well, Dominick, what about price fixing?”

For the Chicago School, nothing is more offensive and anticompetitive than firms getting together to fix prices. Even if you review the literature showing that price fixing usually doesn’t work (and even George Stigler recognizes that), they still argue that it is unproductive activity and that it doesn’t accomplish a social purpose.

The Chicago School does not have an Austrian-style coordination theory of efficiency that recognizes that markets are in a continual process of development. These economists do not recognize that it is impossible to freeze the market in place and declare this arrangement or that arrangement to be efficient according to some extra-market criteria.

Therefore, they will never go all the way and support abolition. Instead, they adopt what appears to be an ad hoc approach to antitrust. It is important to somehow convince the Chicago people that they should give up their equilibrium models and adopt the Austrian theory. I somehow doubt that will ever happen.

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The Mises Wire —the Mises Institute's Blog—offers short, contemporary news and opinion from our scholars and associated personnel. Check back often for the latest commentary on Austrian economics and libertarian political economy.

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